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From Severance Pay to Self-Insurance: Effects of Severance Payments Savings Accounts in Colombia

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  • Kugler, Adriana

    (Georgetown University)

Abstract

In 1990 Colombia replaced its traditional system of severance payments with a new system of severance payments savings accounts (SPSAs). Although severance payments often are justified on the grounds that they provide insurance against earnings loss, they also increase costs for employers and distort employment decisions. The impact of severance payments depends largely on how much of the costs to employers can be shifted to workers. The theoretical analysis in this paper shows that, in contrast to a traditional system of severance payments, the system of SPSAs facilitates the shifting of severance payments costs to workers in the form of lower wages. Empirical results using the Colombian National Household Surveys indicate that the introduction of SPSAs shifted around 80% of the total severance payments contributions to wages and had a positive effect on weekly hours. Results using the 1997 Colombian Living Standards Measurement Survey suggest that, although SPSAs in part replaced employer insurance with self-insurance, SPSAs continue to play a consumption smoothing role for the non-employed.

Suggested Citation

  • Kugler, Adriana, 2002. "From Severance Pay to Self-Insurance: Effects of Severance Payments Savings Accounts in Colombia," IZA Discussion Papers 434, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp434
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    Cited by:

    1. Paula Nagler, 2013. "How unemployment insurance savings accounts affect employment duration: evidence from Chile," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-25, December.
    2. Christian Grund, 2006. "Severance payments for dismissed employees in Germany," European Journal of Law and Economics, Springer, vol. 22(1), pages 49-71, July.
    3. Eslava, Marcela & Haltiwanger, John & Kugler, Adriana & Kugler, Maurice, 2004. "The effects of structural reforms on productivity and profitability enhancing reallocation: evidence from Colombia," Journal of Development Economics, Elsevier, vol. 75(2), pages 333-371, December.
    4. Parsons, Donald O., 2011. "Mandated Severance Pay and Firing Cost Distortions: A Critical Review of the Evidence," IZA Discussion Papers 5776, Institute of Labor Economics (IZA).
    5. Milan Vodopivec, 2004. "Income Support for the Unemployed : Issues and Options," World Bank Publications - Books, The World Bank Group, number 14922, December.
    6. repec:ilo:ilowps:433276 is not listed on IDEAS
    7. Pierre, Gaelle & Scarpetta, Stefano, 2004. "Employment regulations through the eyes of employers - do they matter and how do firms respond to them?," Policy Research Working Paper Series 3463, The World Bank.
    8. repec:idb:brikps:7203 is not listed on IDEAS
    9. Milan Vodopivec, 2013. "Introducing unemployment insurance to developing countries," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-23, December.
    10. Luiza Neves de Holanda Barbosa & Miguel Nathan Foguel & Charlotte Bilo, 2017. "The Brazilian Government Severance Indemnity Fund for Employees (FGTS) and unemployment insurance savings accounts in other countries: a comparative analysis of their effects on the labour market," Working Papers 164, International Policy Centre for Inclusive Growth.
    11. James Alm & Hugo López Castaño, 2002. "Payroll taxes in Colombia," Informes de Investigación 3316, Fedesarrollo.
    12. -, 2016. "Protección y formación: instituciones para mejorar la inserción laboral en América Latina y Asia," Libros de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 40660 edited by Cepal, March.
    13. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance pay programs around the world : history, rationale, status, and reforms," Social Protection Discussion Papers and Notes 62726, The World Bank.
    14. Milan Vodopivec, 2006. "Choosing a System of Unemployment Income Support: Guidelines for Developing and Transition Countries," The World Bank Research Observer, World Bank Group, vol. 21(1), pages 49-89.
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    16. Nagler P., 2013. "How unemployment insurance savings accounts affect employment duration : evidence from Chile," MERIT Working Papers 2013-039, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    17. Pierre, Gaelle & Scarpetta, Stefano, 2007. "How labor market policies can combine workers'protection with job creation : a partial review of some key issues and policy options," Social Protection Discussion Papers and Notes 41439, The World Bank.
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    More about this item

    Keywords

    consumption smoothing; unemployment insurance; tax shifting; Distortions; crowding out;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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